To Lease or Not to Lease - Rental Restrictions in Washington Condominiums

The right to lease a condominium unit is a valuable one, but this right can be restricted if limits appear in the condominium’s original declaration or if enough owners approve an amendment to that document. Condominium boards, owners, and prospective purchasers of units should ask two crucial questions with regard to leasing. First, is there currently a rental restriction in the declaration or an amendment to the declaration? Second, what percentage of owners is necessary to amend the declaration to restrict leasing in the future? The answer to the second question depends on when the condominium was created.

If a condominium’s declaration was recorded on or before July 1, 1990, it can be amended to restrict leasing with the approval of sixty percent of the owners unless the declaration or an amendment to that document specifies a higher requirement. If a condominium’s declaration was recorded after July 1, 1990, ninety percent of the owners (including all units that are being rented) is required to amend it to restrict leasing unless the declaration or an amendment to that document specifies a higher requirement. This thirty point gap is the difference between “possible” and “unlikely” in most associations.

Most rental restriction amendments contain hardship exceptions that permit leasing over rental caps in certain circumstances, but it is a gamble for owners to rely on such provisions. Many condominium boards strictly interpret hardship exceptions and deny most requests that are submitted to them. Even if the present board views hardship requests favorably, the next board may not.

Court Upholds Seattle Condominium Association's Default Judgment Against Insurance Company

In 2005, the Lakewest Condominium Owners Association in Seattle discovered that several of its buildings required major repairs due to rain damage. The Association filed and pursued claims against numerous insurers to pay for the damage, which culminated in lawsuits against some of them. The Association was granted a default judgment in the amount of 7.5 million dollars against Tokio Marine & Fire Insurance Company, Ltd. in October of 2007. A default judgment is entered when a person is served with a lawsuit and does not respond within the time allowed by law. Tokio argued to the court more than one year after the judgment (the applicable deadline) that the judgment should be vacated. The court agreed with Tokio, but this ruling was reversed on appeal in an unpublished decision issued earlier this month. The association's default judgment is thus valid and enforceable against the insurance company.

Washington condominium and homeowners association boards should not be hesitant to file claims with their insurance companies when serious property damage occurs, and they should encourage owners to proactively contact their insurers as well. This is sometimes the only way to avoid major special assessments. It is sometimes necessary to sue insurance companies if they will not respond or if they deny claims that appear to be covered by the policy. Such litigation can obviously turn out very well indeed for the association if the insurer drops the ball and is found in default. The Lakewest case demonstrates that default judgments have value and will be upheld by the courts in some circumstances.

Little Boxes, Big Disputes: Religious Observance Sparks Condo Debate

The King County Bar Bulletin published an article this month that was written by my office. The article discusses three disputes between condominium boards and Jewish unit owners over the display of a small object called a mezuzah on the units' exterior doorposts. It concludes that boards should consider permitting such religious displays subject to reasonable size restrictions. The full article appears on my office's website.

Goat Dispute Highlights Best Practices for Covenant Enforcement

A North Carolina couple has won a legal battle with their homeowners association to keep two Nigerian dwarf goats named Fred and Barney in their yard. The association’s covenants state as follows: "No animals, livestock or poultry of any kind shall be raised, bred or kept on any lot except that horses, dogs, cats and other pets may be kept provided they are not kept, bred, or maintained for any commercial purposes." Several neighbors complained to the board about the smell and noise caused by the goats, so the board ordered the owners to remove them. Litigation ensued, and a judge eventually ruled that Fred and Barney should be permitted to stay because they are pets.

As the cliché goes, life is not black and white. Gray is a popular color in the world of law. Many covenants can be reasonably interpreted in more than one way. Boards should make an effort to play devil’s advocate and view covenants from owners’ perspectives before issuing demands or initiating litigation.

Another lesson that can be gleaned from this story is that it is sometimes better to focus on minimizing the negative effects of a disputed behavior rather than attempting to end that behavior. For example, it may be possible to address the goat odor issue by requiring more frequent bathing and waste removal. It may also be possible to address the goat noise issue by restricting them to certain portions of the property. Boards should always be on the lookout for creative approaches that lead to win-win solutions.

Embezzlement Prevention Strategies from Accountant Andrew Cohen

In light of recent reports regarding embezzlement in Washington condominium and homeowners associations, I recently decided to consult with a local professional who provides financial management and accounting services and discuss strategies to protect association funds. Andrew Cohen is a seasoned Seattle accountant and the co-owner of CoHo Accounting. Andrew and his company focus on providing personalized concierge-level accounting services, and he generously submitted the insights that follow regarding how to prevent embezzlement in community associations.

Embezzlement is similar to being pick-pocketed. You know it happens all the time, but to other people. UNTIL it happens to you! Like being pick-pocketed, embezzlement can be prevented or minimized with just a few basic safeguards.

The consequences of embezzlement can be significant for your association. It often starts when a volunteer gets into some sort of financial trouble or feels undervalued. The person might record their association dues as having been paid when they haven’t. The person might start paying a fake vendor a few hundred dollars a month and charge that expense to maintenance. Such fraudulent transactions are typically buried in the association’s most active expense line, both in terms of dollars and transactions. The person might even write themselves checks from the association’s account.

Boards should implement a system to prevent embezzlement:

1. Diligently review the association’s financial records.
2. Put internal controls in place to make theft more difficult.
3. Pay attention to the behavior of board members.

Diligence

• Review bank statements on a monthly basis.
• Evaluate who is receiving association funds – are any of them odd or unknown?
• Instruct accountant to examine books for discrepancies each quarter.

Internal Controls

• Set limits on the length of board service in the same position.
• Sign checks by hand. Do not use a signature stamp.
• Establish separate banking duties:
o The person who writes checks shouldn’t sign them or reconcile accounts.
o The person who deposits checks should not be able to cash them or open mail.

Here is one way to separate duties on an association board:

1. Secretary – Opens mail; records checks received; sends checks and check register to Treasurer; sends a copy of check register to President; sends bills to Treasurer; and sends bank statements to President.

2. Treasurer – Deposits checks; enters accounts payable and prepares checks for payment; coordinates with the board on insurance and liabilities; ensures that taxes are paid; brings prepared checks to President for signature; generates financial records like profit and loss statements and balance sheets.

3. President – Reviews and signs checks; reviews bank statements to ensure that:
o Deposits coincide with receipt record of HOA dues or assessments paid;
o The cash balance on the bank statement and the balance sheet agree; and
o There are no unusual expenditures. If clear explanations of such expenditures are not forthcoming, this is a red flag. It may simply be lax bookkeeping, but laxity is an opportunity for theft.

Behavior

Boards should stay alert for indications of an elevated risk of embezzlement. For example, does a person with access to association funds:

• Rarely take a vacation? If someone is always there, they can cover their tracks.
• Rarely delegate tasks, yet complain of being too busy? Control includes the power to conceal.
• Have personal financial problems? This increases the motivation to steal.
• Have a very close relationship with or control over a particular vendor? This can provide a way to obtain association funds secretly.
• Use drugs or alcohol to excess? This clouds judgment and lowers inhibitions.

If you are interested in learning more about how to protect your association from embezzlement, CoHo Accounting can help with innovative financial services designed to provide clients with peace of mind.